View From Florida (Part IV)

January 6, 2007

View From Florida (Part IV, Gated Community)

(c) copyright, View From Silicon Valley, 2007. All rights reserved.

In "View From Florida (Part I)" Our Florida vacation started with miserable airline service after which we found empty tourist areas, deserted hotel and condo hotels and "missing" works of Salvador Dali: http://www.viewfromsiliconvalley.com/id288.html.

In "View From Florida (Part II)", we toured a remote, but high-end, real estate development:
http://www.viewfromsiliconvalley.com/id289.html.

In "View From Florida (Part III, Guts Game)" we reviewed another remote suburb whose prices were maybe ~$150K in 1999 but are now holding at $350K+:
(http://www.viewfromsiliconvalley.com/id290.html).

To round out the picture, we also checked out a gated community literally across the street from the "guts game."

The gate guarded by a young lady only too happy to hand us literature and wave us through when we said we wanted to look at houses. The literature turned out to be fliers from a real estate agent trying to sell four houses inside the development.

As we began to search out these "opportunities," we kept noticing very small signs similar to those placed by lawn-treatment firms when they've sprayed for bugs and/or laid down fertilizer. Our eyesight is no longer tremendously sharp, and we were distracted trying to find street names. The light bulb eventually went on and we realized these were actually "For Sale" signs rendered in ~8" x16".

We were gratified to think there was much more inventory than just the four on our flier. We were also frustrated to realize how difficult it would be to get a sense for how many houses were really for sale. If we had to stop and hold up traffic to write down the tiny details from each sign and separately contact each realtor, this gated community was going to escape our interest. (Truth be told, if I run sales in a subdivision like this, one of my goals is to make it wicked difficult to figure how many listings are actually available. Due to the internet, I might fail but at least I would have a strategy...)

We stopped by a model home and heard a pitch about how a "former VP" of the builder bought this house and leased it back to the builder. The lease was expiring and he wanted to sell, with his furniture, for $1.2M. (Or $1.1M without.) If we didn't want the model, it was OK since this VP had also bought up 43 lots. Subtracting the model and 15 lots marked sold, we could pick from 27 empty lots (priced from $180K to $375K) and order any of nine home models (priced from $529K to $761K) or even use him as an architect to build something completely custom.

Let's see, that's $709 to $1.36M, before any add-on options (add at least another $50K), for a land-locked lot in a remote suburb of Orlando. Well, if that's all there is, then maybe this ex-VP knows what he's doing. (Keeping in mind, of course, the median family income in this city is $36K.)

Heading back out through the gate, we found the sales office. How's that for a well-thought-out design? On your way in, the guard at the gate doesn't tell you there's a central sales office? (And lets you in without even pretending to stop there?) Than you don't see a sales office sign until you're on the road out?

We whipped into the sales office where the agent started off the conversation telling us how he could tell right away we were tourists. After all, we were wearing what looked like new clothes. (OK, so how is this observation going to make us want to buy here? Or was this a subtle clue most real estate owners can no longer afford to buy new-looking clothes?!?)

Walking in right behind us was a guy in blue jeans and baseball cap (i.e., not new clothes) who very matter-of-fact said he wanted to see xxx number of square feet up to $yyy price range (I think he said $1.25M?). The sales guy dropped us like we were hot and was headed out the door and into the guy's pick-up truck in less than five minutes.

We were handed off to an older sales guy with really awful-smelling breath who told us to have a seat. We ignored his direction, instead asking if there was a list of what was available inside the gates? He told us again to sit down while he shuffled off into a back office.

When he shuffled back, he again told us to sit down but then handed us two pages of "Available Homes." Lo and behold, it was a list of 42 houses, plus another 15 vacant lots for sale! (25 of 42 purchased 2003 or later.) Eureka! We headed back in, easily back past the guard, to survey the listings.

Now we're getting somewhere! We now have 43 homes for sale plus 42 empty lots. A map survey estimates ~730 home sites, suggesting ~12% of this "exclusive" gated community is readily available.

Wait a minute! There are now 42 houses to see. How will we take notes and keep them all straight? More out of spite than because we expected to accumulate a lot of useful data, we decided to seek out the first, and cheapest, house on the list.

By coincidence, it was having an open house on December 23. It was an empty, 4/3/no pool, 2,300 square feet at $389,900 ($169 /square foot). It was an "end unit" adjacent to a busy road bordering the development. Instead of a big fence, the property was separated from this busy road by only a hedge which I could easily see, and turn a shoulder to walk, through. (Another blow to the alleged security of this gated community.) In case the location and noise weren't sufficiently discouraging, there were also several power lines running along the road and property.

In for a penny, in for a pound. We went in and were immediately greeted the agent. She was very nice but needed my help getting what turned out to be a petrified toad out of one of the bathrooms (she was agraid to touch it or even go near it). Then I had to help her by sweeping out a June bug which got in while I tossed the toad into the back yard.

Despite a near-$400K price in a remote part of metro Orlando, the interior was very ordinary --no granite counters, no high-end appliances or fixtures, etc. The agent readily admitted it had been empty four months.

As we were leaving, she asked for feedback. I took a deep breath and looked up at the ceiling to try and stop myself from laughing. In my best effort not to sound too sarcastic, I told her the price should be more like $225K, not $390K. (I didn't contain my sarcasm very well. In truth this house would probably need to even be $150K if you really expect me to live this far outside town and still be stuck near power lines and road noise.) My wife proved to be the lone mature adult between us and instead explain the power lines alone made it out of the question.

When we got back to a PC we pulled up Zillow which valued this $390K listing at $359K. (Which is no small insult based on how often Zillow seems to value many places even higher than their current asking price.)

Zillow also reveals the current owner bought it March, 20, 2005 for $340K. In other words, the current asking price is exactly a $50K mark-up from 21 months ago. Zillow shows a 2005 assessment of $241K, suggesting this seller paid the original owner (who bought it from the builder in 2004) a ~$99K mark-up.

How did the current owner justify paying a $99K mark-up within a year? How does the current owner/seller justify another $50K mark-up?

I was very satisfied to discover my gut reaction of $225K actual value was pretty close to the Zillow data. (Except, of course, for the fact that "someone" was willing to pay a $99K mark-up. If "someone else" now pays a $149K mark-up it will prove once again I know nothing about real estate-- at least for a moment.)

For reference, the next two listings on the December 22, 2006-dated "Homes Available" sheet were $399K ($183/sq.ft.) and $425K ($180/sq.ft.). The list topped out at $1.446M for a 4 /3.5/pool, 4,321 square feet, "lake" front, ($335 /square foot) with "Year Built" listed at "2007."

We know from "View From Florida (Part III)" that $180 /square foot is the magic number at the "low end" for this area. At $169/ square foot, the seller of this four-month-empty house probably feels put out. He probably feels like he is "giving it away" and selling at a "discount."

Time will tell if my $225k -$240K estimate or the $390K asking price is more accurate. A quick back-of-the-napkin estimate suggests this buy is burning ~$3,200 per month. Four months of that plus 5% real estate commission adds up to pver $32K off the top of if he sells "today." My March it will be ~$42K off the top. Assuming the seller was "even" when moving out, by May a 5% RE commission plus carrying costs will have burned up the whole $50K mark-up.

Conclusion:
Even in so-called "gated communities," prices have little to do with value --or even safety.

Coming up: Part V, How we estimate value.
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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and sell at your own risk (just like we do.)